Summary

Results in Brief

The University of California (university) is one of the premier public university systems in the nation, enrolling more than 252,000 students at its 10 campuses as of the fall of 2014. As a public institution, the university should serve primarily those who provide for its financial and civic support—California residents. However, over the past several years, the university has failed to put the needs of residents first. In response to reduced state funding, it has made substantial efforts to enroll more nonresident students, who pay significantly more annual tuition and mandatory fees than resident students—$37,000 compared to $12,240 in academic year 2014–15. The results are stark: From academic years 2010–11 through 2014–15, total nonresident enrollment at the university increased by 82 percent, or 18,000 students, while resident enrollment decreased by 2,200 students, or 1 percent.

The decision to increase nonresident enrollment has had profound repercussions for residents who apply for admission. According to the Master Plan for Higher Education in California (Master Plan), which proposed the roles for each of the State’s institutions of higher education, the university should select for admission from the top 12.5 percent of the State’s high school graduating class. Based on the university’s interpretation, to comply with the Master Plan, the university guarantees admission to all residents who meet this standard, although not necessarily at the campuses of their choice. Although the university stated that its decision to enroll more nonresidents has not precluded it from meeting its Master Plan commitment to admit qualified residents, we do not believe that the university has sufficiently substantiated this claim.

Specifically, the Master Plan recommends that nonresidents possess academic qualifications that are equivalent to those of the upper half of residents who are eligible for admission. That is, nonresidents should demonstrate higher qualifications than the median for residents. However, in 2011 the university modified its admission standard to state that nonresidents need only to “compare favorably” to residents. During a three-year period after this change, the university admitted nearly 16,000 nonresidents whose academic scores fell below the median for admitted residents at the same campus on every grade point average and admission test score we evaluated. By admitting nonresidents with lower academic qualifications on these key indicators than the median for residents it admitted, the university essentially deprived admittance to highly qualified residents.

To increase tuition revenue in the face of state funding shortfalls, the university implemented two key procedural changes that encouraged campuses to maximize nonresident enrollment. In 2008 the university began allowing the campuses to retain the nonresident supplemental tuition revenue (nonresident revenue) they generated rather than remitting these funds to the Office of the President, which resulted in campuses focusing resources on enrolling additional nonresidents. Also in 2008, the Office of the President began establishing separate enrollment targets—systemwide targets for the number of students each campus should strive to enroll each year—for nonresidents and residents, and it allowed each campus to establish its own separate enrollment targets. In subsequent years, each of the four campuses we visited—Davis, Los Angeles, San Diego, and Santa Barbara—increased their individual campus enrollment targets for nonresidents at a faster rate than their targets for residents. These two procedural changes satisfied the university’s goal: In fiscal year 2014–15 the university generated $728 million from the supplemental tuition that nonresidents paid—a growth of $403 million, or 124 percent, from fiscal year 2010–11.

Furthermore, over the past 10 years, the university began denying admission to an increasing number of residents to the campuses of their choice. If residents are eligible for admission to the university and are not offered admission to the campuses of their choice, the university offers them spots at an alternative campus through what it calls a referral process. In contrast, nonresidents, if admitted, are always admitted to at least one campus of their choice. Of particular concern is that, over the same time period, the university’s campuses denied admission to nearly 4,300 residents whose academic scores met or exceeded all of the median scores for nonresidents whom the university admitted to the campus of their choice. According to the university, the referral process is critical to it meeting its Master Plan commitment to admit the top 12.5 percent of residents. However, few of the residents whom the university admits and refers to an alternate campus ultimately enroll. In academic year 2014–15 for example, 55 percent of residents to whom the university offered admission to one of the campuses to which they applied enrolled, while only 2 percent of the 10,700 residents placed in the referral pool enrolled.

According to the university, it estimated that it admitted the top 14.9 percent of the eligible California high school graduating class in academic year 2014–15, which included the residents in the referral pool. If we exclude the residents placed in the referral pool and who did not ultimately enroll at the referral campus, the university actually admitted 12.4 percent of the California high school graduating class—less than the 12.5 percent Master Plan commitment. Because placements in the referral pool result in significantly fewer enrollments of residents than admissions to their campus of choice, we question whether the university should include the residents in the referral pool when computing its admission of the top 12.5 percent of California high school graduates.

The university’s admission decisions have also hampered its efforts to meet its own and the Legislature’s desire that the university’s student body reflect the diversity of the State. While underrepresented minorities—which the university considers to be Chicanos/Latinos, African Americans, and American Indians—represent 45 percent of California’s population, they make up 30 percent of the university’s overall undergraduate population. Although nonresidents bring geographic diversity to the university, only 11 percent of domestic undergraduate nonresidents were from underrepresented minorities as of academic year 2014–15. The university will struggle to ensure that its student population reflects the diversity of the State if it continues to increase nonresident enrollment.

In reaction to state funding reductions, the university has doubled resident mandatory fees—base tuition and the student services fee—over the past 10 years, which has made it difficult for California families to afford and budget for this important investment. We expected the university to justify these tuition increases by basing resident tuition on the actual costs to educate students. However, the university has not conducted a usable study to determine those costs, thereby limiting its ability to appropriately justify tuition increases. Although the university produced a report on the total costs of education that the Legislature required, the university cautioned that decision makers should not use the report as a solid rationale for policy decisions or resource allocations because the university used many assumptions, estimates, and proxies to calculate the costs it included in the report. That cost study is also problematic because the source of the data it uses does not tie to readily available public financial data, such as its audited annual financial report.

The university could have taken additional steps to generate savings and revenue internally to mitigate the impact of its admissions and financial decisions on residents. For example, the Legislature required the university to enroll an additional 5,000 residents in academic year 2016–17 as a condition of receiving $25 million in state funds. While the university estimates these 5,000 students will cost approximately $50 million to educate, or $10,000 per student, in addition to the tuition they pay, it has not conducted a study to support that estimate. The university plans to use its other funding sources to pay for the remaining $25 million, primarily by not offering financial aid to new nonresidents. These actions suggest that the university has the ability to use funds that it had dedicated for other purposes to enroll additional residents.

We also identified key areas in which the university could have reduced its costs in recent years, thus making funds available to enroll more residents. For example, the university’s spending on employee salaries increased in eight of the last nine fiscal years despite the State’s fiscal crisis. By fiscal year 2014–15, its annual salary costs had risen to $13 billion. The university also paid its top executives significantly more than employees in other high‑level state positions receive: 14 of 15 of those in its top leadership positions earned at least $400,000 in fiscal year 2014–15, which was significantly more than the executive branch paid the governor and directors of several large state departments. Although the salaries of the university’s chancellors rank low in comparison to other higher education and research institutions, the university could do more to help justify its salaries and benefits by conducting regular compensation and benefits studies.

Moreover, the university could have engaged in cost-saving efforts related to one of its initiatives and to recruiting. Specifically, the university did not maximize the benefits that it could have achieved through an initiative it developed in 2010 called Working Smarter, which the university asserts generated $664 million in savings and new revenue. The university’s goal for Working Smarter was to generate administrative savings and new revenue sources that it could redirect to the university’s academic and research missions. However, the university is unable to substantiate the $664 million of savings and new revenue that it asserts the initiative achieved or even how much the university redirected to its academic and research missions. In addition, the university does not require campus participation in the initiative, nor does it centrally manage the savings or revenue that the campuses generate. The university estimates that if it had achieved a campus participation rate of 80 percent for one program alone, it would have generated $9 million of additional savings. We also found that in fiscal year 2014–15, the university spent $4.5 million to recruit undergraduate nonresidents, a 400 percent increase over the previous five years. A reasonable limit on nonresident recruiting expenditures could have resulted in significant savings for the university.

Additionally, the university publicly claimed in its operating budgets that increased enrollment of nonresidents has allowed it to enroll more residents. The university subsequently clarified to us that nonresident revenue has enabled campuses to continue to enroll residents above state-funded levels. However, the number of residents enrolled at the university actually decreased by 2,200 students—or 1 percent—from fiscal years 2010–11 through 2014–15 while nonresident enrollment increased by 18,000 students, or 82 percent. Thus, contrary to the university’s claim, the amount of nonresident revenue the campuses received has not had a significant impact on the number of residents that they enrolled. In fact, our review of each campus’s spending of nonresident revenue revealed that they spent these funds across a variety of areas, not all of which directly benefited residents.

The university also did not sufficiently monitor 18 programs that do not directly relate to teaching students but which nonetheless received $337 million in state funds for fiscal year 2014–15. Although these programs may provide indirect and important benefits to students, the university has not regularly evaluated its need to continue funding them through state appropriations rather than seeking alternative funding sources. For example, the university acknowledged that it could potentially find alternative sources of funding for two programs to which it allocated $33 million in state funding in fiscal year 2014–15.

In addition, the university’s efforts to equalize its per-student state funding across its campuses did not completely address past concerns regarding its methods for allocating state funding. After our 2011 audit identified inequity in per-student funding among the campuses and a lack of transparency in how the university distributes funds, the university embarked in 2012 on an effort to address these concerns, which it refers to as rebenching. However, we identified several problems with rebenching, including the fact that the university based the formula it uses to redistribute funds not on the actual costs to educate different types of students but instead on costs it judgmentally assigned.

Moreover, the university made allocation decisions that excluded $886 million in state funds from the amount it distributed to campuses through per‑student funding for fiscal year 2014–15. This amount represented nearly one-third of the university’s total state funding for that year, significantly affecting the amount of per‑student funding each campus received. Specifically, if the university includes all funds that the State provides to the university, per-student funding would be as much as $10,900 per student or as little as $7,600 per student if the university continues to exclude that state funding.

Although the university’s actions may be justified, this information is not transparent or easily accessible to stakeholders. Furthermore, not including nonresident revenue in a per-student funding calculation contributes to the persistence of per-student funding inequities among the campuses. These funding inequities have continued to disproportionately affect underrepresented minority students. Specifically, the highest‑funded campuses when we include nonresident revenue—Berkeley, Los Angeles, and San Diego—are among the four campuses with the lowest percentage of underrepresented minority students.

During our audit, the university stated its intent to address several of the key concerns that we raise in this report. In November 2015 the university committed to enrolling an additional 10,000 residents over the next three academic years. In addition, the university addressed two of the flaws we identified in its efforts to equalize per-student state funding. Nonetheless, because of the significant adverse repercussions for residents and their families resulting from the university’s past actions, legislative intervention is necessary to ensure that a university education once again becomes attainable and affordable for all California residents who are qualified and desire to attend.

Specifically, the Legislature should consider limiting the percentage of undergraduate nonresidents that the university can enroll each year. Between academic years 2005–06 and 2007–08—before the fiscal crisis—nonresidents comprised about 5 percent of the university’s new undergraduate enrollment. By academic year 2014–15, that percentage had climbed to more than 17 percent, which translated into more than 7,200 additional new nonresident undergraduates enrolled over a 5 percent limit. Implementing a 5 percent limit on new nonresident enrollment would allow the university to enroll an equivalent number of additional new resident undergraduate students per year—about 7,200—more than the number it enrolled in academic year 2014–15.

Requiring the university to enroll these additional residents would necessitate an increased annual financial commitment from both the university and the State to compensate for the increased enrollment of resident undergraduates and the decrease of nonresidents. If the Legislature were to commit additional funds to the university for the purpose of meeting agreed-upon enrollment percentages, it could do so using a phased-in approach. Specifically, the Legislature could require the university to meet enrollment targets within, for example, four years, and it could provide the university with incremental increases in appropriations each year until the university reaches those targets.

Recommendations

To meet its commitment to California residents, the university should do the following:

Revise its admission standard for nonresidents to reflect the intent of the Master Plan. The admission standard should require campuses to admit only nonresidents with admissions credentials that place them in the upper half of the residents it admits.

Amend its referral process by taking steps to increase the likelihood that referred residents ultimately enroll.

To ensure that the university meets its commitment to residents and to bring transparency and accountability to admission outcomes, the Legislature should consider excluding the students who the university places in the referral pool and who do not ultimately enroll at the referral campus when calculating the university’s Master Plan admission rate until the percentage of students who enroll through the referral process more closely aligns with the admission percentages of the other campuses.

The university should conduct a cost study at least every three to five years and ensure that it represents the costs to educate students and contains amounts that are based upon publicly available financial reports. The university should use the results of the cost study as a basis for the tuition it charges and for the proposed funding needs that it presents to the Legislature.

To ensure that it has accurate information upon which to make funding decisions, the Legislature should consider amending the state law that requires the university to prepare a biennial cost study. The amendment should include requirements for the university to differentiate costs by student academic levels and discipline and to base the amounts it reports on publicly available financial information.

To ensure that the university does not base future admission decisions on the revenue that students generate and to make the university more accessible to California residents, the Legislature should consider amending state law to limit the percentage of nonresidents that the university can enroll each year. For example, it could limit nonresident undergraduate enrollment to 5 percent of total undergraduate enrollment. Moreover, the Legislature should consider basing the university’s annual appropriations upon its enrollment of agreed-upon percentages of residents and nonresidents.

To improve its internal operations and promote cost savings related to the $13 billion it spent on employee salaries in fiscal year 2014–15, the university should conduct a systemwide assessment to identify ways to streamline and reduce its employee costs.

To maximize the savings and new revenue from the Working Smarter initiative and ensure that the university uses those funds for its academic and research missions, the Office of the President should:

Immediately require that the campuses fully participate in all projects.

To the extent possible, implement a process to centrally direct these funds and ensure that it can substantiate any actual savings and new revenue generated.

To ensure that its recruiting efforts benefit residents, the university should prioritize recruiting residents over nonresidents and establish a limit on the amount of funds it spends to recruit nonresidents. In particular, the university should focus its efforts broadly to ensure that it effectively recruits residents who are from underrepresented minorities.

The university should track the use of state funds for programs that do not directly relate to educating students, annually reevaluate these programs to determine whether they continue to be necessary, and explore whether they could be funded from alternate sources.

To increase its transparency and help ensure that it can justify its spending decisions, the university should make publicly available how it allocates state funding to the campuses and to other programs or uses.

To ensure that its rebenching efforts lead to equalized per-student funding among the campuses, the university should update the costs it uses in its formula every three to five years to ensure that they reflect the actual costs of instruction.

Agency Comments

The university disagreed with a key conclusion of our report—that increasing nonresident enrollment has disadvantaged California resident students. However, in its response the university did not provide evidence that refuted our conclusion nor did it identify any factual errors with our draft report. Nevertheless, the university indicated that it plans to implement only seven of our 21 recommendations.

We are disappointed that the university objects to many of our recommendations despite clear evidence that improvements are needed. Beginning on page 105 we provide our perspective on the university’s response to our report.